Risk And Volatility Are Not The Same

The stock market was way down and now it's a up a bit. I've found myself thinking about the relationship between volatility and risk. First, some numbers.

  • The S&P 500 is now +27% from its lows. The lows were around 2 weeks ago. 2 weeks! 
  • To return to new highs, the S&P will need to rise another 22%. That would mean a rise of around 55% from the bottom.
  • At the lows, the S&P was down -35% from its highs. The highs were reached around 2 months ago.
These numbers don't mean anything, really, without interpretation. I could add employment numbers and stimulus numbers and fibonacci numbers and all sorts of numbers. The key for investing is the interpretation -- where are the opportunities and where are the risks?


Risk Does Not Feel Risky


I was investing very little during the tech bubble, and then a lot more during the Great Financial Crisis, and now a lot more than either of those times. One thing I've learned along the way during these bear markets is that risk and volatility are not the same thing. Stocks "felt" risky when the market was closer to the lows; the market had been crashing for days on end. Stocks "feel" less risky now after a couple weeks of relative stability and gains. 

The opposite is true. 

From an investment standpoint, stocks were less risky 2 weeks ago (one had a better opportunity to make money) and are more risky now (one has a greater probability of losing money). 

What's interesting is that stocks were very risky in February when valuations were sky high and there was almost no volatility. For months the S&P slowly levitated upwards and nothing felt risky when risk was at its highest. 

I could spend a lot more time on this point but I should mention that in my view, risk in markets is mostly about valuations and financial stability; the virus is a huge event in itself but not the whole story. For example, if an airline (or hotel or restaurant or family or national economy) had no debt and 3 years worth of cash on its balance sheet, the risk of going bust would be low.  

Bear Market Game Plan


My personal interpretation is that we're having a bear market rally and the market will eventually roll over and go down some more. It would take a -21% move to retest the lows. I don't know if that will happen, but if it does, it will again be less risky to buy. I am of course talking about index funds here and not individual stocks, which could trade on their own merits (but often get dragged along).

So far, I've been investing in the indices according to my plan, which was to buy on the way down and sell on the way up. Buy low and sell high. It seems simple but it isn't, because of the psychology around risk and volatility. This is not advice to anyone other than myself. Many people aren't interested in trading, or might philosophically consider market timing a loser's game, or whatever. 

With regard to individual stocks and positions, I'm trading around opportunities and will be ruthless because with $0 commissions why not? My largest position is in Gold / Silver / Gold Mining stocks, which is working well so far. Government intervention / stimulus is bullish for gold. Yesterday the Fed announced another 2 Trillion (yes with a T) program to buy ... everything ... sending gold up 2% and gold miners up 10%. I'm sticking with this trade. 

More on other positions another time.

Pandemic Pleasures

Interesting that during the pandemic people gravitate toward nostalgia and guilty pleasures. Recipes from childhood, fluffier fiction, any kind of TV.

What I'm Reading: Gray Mountain by John Grisham. 

What I'm Watching: Jurassic World and reruns of the NBA Finals.

What I'm Eating and Drinking: Hamburgers and red wine.

Stoic / Mindful Thought: If someone is frozen on Zoom, are they any less present?

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